Chapter - 8
Corporate Strategy
WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? ?
The task of crafting a diversified company’s overall corporate strategy falls squarely in the lap of top-
level executives and involves four distinct facets:
Picking new industries to enter and deciding on the means of entry.
Pursuing opportunities to leverage cross-business value chain relationships, where
there is strategic fit, into competitive advantage.
Establishing investment priorities and steering corporate resources into the most
attractive business units.
Initiating actions to boost the combined performance of the corporation’s collection of
businesses.
WHEN TO CONSIDER DIVERSIFYING?
Corporations consider diversification when they seek to:
1. Reduce Risk
2. Explore New Markets
3. Adapt to Industry Changes
4. Capitalize on Synergies
5. Enhance Growth
6. Exploit Core Competencies
LO 1BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING
To add shareholder value, a move to diversify into a new business must pass the three Tests of
Corporate Advantage:
1. The Industry Attractiveness Test
2. The Cost of Entry Test
3. The Better-off Test
APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP
Diversifying by Acquisition of an Existing Business
Entering a New Line of Business through Internal Development
Using Joint Ventures to Achieve Diversification
Choosing a Mode of Entry
—depends on the answers to four important questions:
Does the company have all of the resources and capabilities it requires to enter the
business through internal development, or is it lacking some critical resources?
• Are there entry barriers to overcome?
• Is speed an important factor in the firm’s chances for successful entry?
• Which is the least costly mode of entry, given the company’s objectives?
CHOOSING THE DIVERSIFICATION PATH:
RELATED
UNRELATED BUSINESSES
DIVERSIFICATION INTO RELATED BUSINESSES
Transferring specialized expertise, technological know-how, or other competitively valuable
strategic assets from one business’s value chain to another’s.
• Sharing costs between businesses by combining their related value chain activities into a single
operation.
• Exploiting the common use of a well-known brand name.
• Sharing other resources (besides brands) that support corresponding value chain activities across
businesses.
• Engaging in cross-business collaboration and knowledge sharing to create new
competitively valuable resources and capabilities.
Identifying Cross-Business Strategic Fit along the Value Chain
Strategic Fit in Supply Chain Activities
Strategic Fit in R&D and Technology Activities
Manufacturing-Related Strategic Fit
Strategic Fit in Sales and Marketing Activities
Distribution-Related Strategic Fit
Strategic Fit in Customer Service Activities
Strategic Fit, Economies of Scope, and Competitive Advantage
From Strategic Fit to Competitive Advantage, Added Profitability, and Gains in Shareholder Value
DIVERSIFICATION INTO UNRELATED BUSINESSES
company managers spend much time and effort screening acquisition candidates and evaluating the pros
and cons of keeping or divesting existing businesses, using such criteria as:
• Whether the business can meet corporate targets for profitability and return on investment.
• Whether the business is in an industry with attractive growth potential.
• Whether the business is big enough to contribute significantly to the parent firm’s bottom line.
Building Shareholder Value via Unrelated Diversification
The Benefits of Astute Corporate Parenting Astute corporate parenting refers to a business strategy where a parent company effectively manages and
supports its subsidiaries or business units
Judicious Cross-Business Allocation of Financial Resources
Acquiring and Restructuring Undervalued Companies
The Path to Greater Shareholder Value through Unrelated Diversification
For a strategy of unrelated diversification to produce companywide financial results above and beyond
what the businesses could generate operating as stand-alone entities, corporate executives must do three
things to pass the three tests of corporate advantage:
1. Diversify into industries where the businesses can produce consistently good earnings and returns on
investment (to satisfy the industry-attractiveness test).
2. Negotiate favorable acquisition prices (to satisfy the cost of entry test).
3. Do a superior job of corporate parenting via high-level managerial oversight and resource sharing,
financial resource allocation and portfolio management, and/or the restructuring of underperforming
businesses (to satisfy the better-off test).
The Drawbacks of Unrelated Diversification
Demanding Managerial Requirements
Limited Competitive Advantage Potential
Misguided Reasons for Pursuing Unrelated Diversification
Companies sometimes pursue unrelated diversification for reasons that are misguided. These include the
following:
• Risk reduction.
• Growth.
• Stabilization.
• Managerial motives.
EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY
The procedure for evaluating the pluses and minuses of a diversified company’s strategy and deciding
what actions to take to improve the company’s performance involves six steps:
1. Assessing the attractiveness of the industries the company has diversified into, both individually and
as a group.
2. Assessing the competitive strength of the company’s business units and drawing a nine-cell matrix to
simultaneously portray industry attractiveness and business unit competitive strength.
3. Evaluating the extent of cross-business strategic fit along the value chains of the company’s various
business units.
4. Checking whether the firm’s resources fit the requirements of its present business lineup.
5. Ranking the performance prospects of the businesses from best to worst and determining what the
corporate parent’s priorities should be in allocating resources to its various businesses.
6. Crafting new strategic moves to improve overall corporate performance.
